Caution in troubled times

The Union Budget 2009-10 reflects not only the high and varied expectations of United Progressive Alliance (UPA) supporters, but also a very cautious view on the recovery from the ongoing global recession. Continuing with the expansionary fiscal policy stance initiated in the middle of the last fiscal year, total expenditure is budgeted to go up by more than a third over the 2008-09 budget estimate (BE) and reach Rs10.2 trillion in 2009-10. With revenues rising by less than 2% over the previous year’s BE, the fiscal deficit is projected to go up more than threefold from 2008-09 BE to Rs4 trillion. At 6.8% of gross domestic product (GDP), the fiscal deficit is higher than what it was in 1990-91, the beginning of reforms. In the middle of a global recession, the suspension of the Fiscal Responsibility and Budget Management Act is loud and clear.

Ashok K. Lahiri. executive director, ADB. Ramesh Pathania / Mint

On the tax revenue front, the deceleration in the rate of growth observed in 2008-09 is expected to continue in the current year. Growth in tax revenues is estimated to have declined from over 25% in 2007-08 to about 7% in 2008-09. In the current year, the BE for gross tax revenue is Rs46,600 crore lower than the BE for 2008-09. In spite of this decline, the exemption for personal income tax has been raised by Rs10,000 to Rs15,000, the surcharge on direct taxes and the fringe benefit tax have been abolished, and investment-linked tax exemptions introduced to provide relief and boost domestic demand. To encourage the New Pension System (NPS), apart from continuing with the exempt-exempt-taxed (EET) status, the NPS trust has been exempted from tax on its income and from the dividend distribution tax that it receives as dividends. Together with the increase in the rate of minimum alternate tax (MAT) from 10% to 15% of book profits, the direct tax proposals in the Budget are revenue neutral.

On the indirect tax front, apart from some minor adjustments in customs duty rates on items such as set-top boxes and LCD panels for televisions, the customs duty on gold and silver has been doubled. Under Central excise duties, the previously exempt cotton textiles have been brought under the optional 4% Central value added tax (Cenvat), and the uniform rate of 8% on man-made fibre and yarn on a mandatory basis and on stages beyond fibre and yarn on an optional basis restored. Furthermore, barring a few exceptions, the rate of duty on items attracting the 4% Cenvat rate has been raised to the mean Cenvat rate of 8%. The specific duty on cars has been reduced and made uniform at Rs15,000 across engine size. Service tax has been extended to the legal profession and exporters have been exempted from payment of service tax to transporters and commission agents. The indirect tax proposals are expected to yield a net gain of Rs2,000 crore in a full year.

The Budget aims to curtail the subsidy bill in 2009-10 below its 2008-09 revised estimate (RE) level by Rs18,000 crore. Last year witnessed an explosive growth in the already large subsidy bill of the government. Subsidy provisions for fertilizer in 2008-09 alone, including special securities of Rs20,000 crore issued, went up from an initial BE of Rs31,000 crore to Rs95,800 crore at the RE. Similarly, factoring in the provision of Rs75,900 crore for issue of securities to oil marketing companies against under-recoveries on the sale of sensitive petroleum products, the total provision for petroleum subsidy increased from Rs2,800 crore to Rs78,800 crore. With the impact of the enhanced minimum support price for wheat and rice, the increase in the total provision for subsidies on food, fertilizer and petroleum products between BE and RE is from Rs66,500 crore to Rs2.2 trillion, amounting to about 4% of GDP. The pre-Budget increase in the prices of petrol and diesel by Rs4 and Rs2, respectively, with effect from midnight of 1 July will help contain the subsidy bill in the current year. But, clearly, more is needed on the subsidy front. What the Budget gave, however, are only hints, such as the move from a fertilizer product pricing regime to nutrient-based subsidy regime and an expert group on petroleum product pricing. The details are missing as yet.

Along with the expansionary stance, comes the announcement of a host of bold measures. While the details are not yet known, the minister, for example, announced the target of enhancing investment in infrastructure to above 9% of GDP by 2014, improved targeted public service delivery with the help of an online database with identity and biometric details of citizens maintained by the Unique Identification Authority of India, and the smooth introduction of the goods and services tax (GST) from 1 April.

Finance minister Pranab Mukherjee proposed “to encourage people’s participation in our disinvestment programme” while “retaining at least 51% government equity in our enterprises”, provoking much speculation about the government’s plans for disinvestment revenues and their treatment in the Budget. However, these are unlikely to be shown under regular non-debt receipts. After the setting up of the National Investment Fund (NIF), there is a decision on not utilizing the sale proceeds of government equity in public sector units to finance the fiscal deficit. Only time will tell how much the government expects to receive in the NIF from disinvestment.

The mood in Parliament on Monday appeared to be in favour of an expansionary fiscal stance. The finance minister was applauded when he announced that, compared with eight digits at the time of independence, total rupee expenditure for 2009-10 is going to cross 12 digits.

Much of the expansion in public expenditure between 2008-09 and 2009-10 in BE terms is in revenue or current items. Compared with an expansion of Rs30,800 crore in capital expenditure, the increase in revenue expenditure is Rs2.39 trillion.

Reconciling the compulsions of the present with the promises of the future is often difficult. Budget time in India brings these difficulties into sharp relief.

The promise of being among the top three in the world economy in another two decades sits uncomfortably, with over a fifth of the country’s over a billion people still below the poverty line in the well over a trillion dollar Indian economy. The outlays on revenue and capital items reflect this constant tension.

Emphasizing the challenge of leading the economy to a high annual growth of GDP of 9% at the earliest, the Budget also promotes inclusive growth by enhancing outlays on the National Rural Employment Guarantee Scheme (NREGS) by 144% to Rs39,100 crore, expanding the subsidy bill between BE 2008-09 and BE 2009-10 by another Rs39,800 crore, extension of the agriculture debt relief and waiver scheme by six months, promising progress on National Food Security Act, and allowing the fiscal deficit to exceed Plan expenditure.

“Safety first” is likely to have been the guiding principle followed by finance minister Mukherjee in formulating the Budget. If indeed the global recession turns out to be a prolonged one, the expansionary budget will serve the country well by propping up domestic demand and making up for sagging exports. However, there will be a need for rapid course correction if the global recovery resumes sooner than later, and India starts suffering from supply constraints rather than demand insufficiency, as it often has. According to the Economic Survey, there are already some disturbing signs in the divergence between the inflation rate as measured by the Consumer Price Index and the Wholesale Price Index. Furthermore, the large fiscal deficit may not only complicate the conduct of monetary policy but by pushing the interest rate up dampen private investment and hence curtail the supply response. The hope is finance minister Mukherjee has worked out not only the detailed road map of bold reforms but also the mid-stream course corrections to steer India to its promised goal. Rated as one of the best finance ministers of the world as far back as 1984, and also described as a master manager, he should be able to manage the road map andthe correction.

Ashok K. Lahiri is an executive director, Asian Development Bank (ADB), Manila. The views expressed here are personal and do not reflect those of ADB.